New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
ONE COMMERCE PLAZA
ALBANY, NEW YORK 12257

Eliot Spitzer
Governor

Eric R. Dinallo
Superintendent

The Office of General Counsel issued the following opinion on July 23, 2007 representing the position of the New York State Insurance Department.

RE: Rebates/Inducements

Questions Presented:

1) In connection with the sale of group health insurance to employers, may an insurance agent or broker, without running afoul of the anti‑rebating and inducement provisions of N.Y. Ins. Law § 4224 (McKinney 2007), provide prescription drug discount cards, or enrollment in an online information service that rates and provides information about physicians, at no cost to the employers?

2) In connection with the sale of group health insurance to an employer, may an insurance agent or broker provide, at no cost to the employer, any of the following administrative services without running afoul of Insurance Law § 4224 if such services are not specified in the insurance policy?

a) Access through a website created by the agent or broker to an “employee benefit portal” that contains useful information about group insurance plans currently in place, forms needed for plan administration, insurance company website links and answers to frequently asked questions related to the insurance.

b) Complete Comprehensive Omnibus Budget Reconciliation Act of 1986 ("COBRA"), 29 U.S.C.A. § 1161 et seq. (LEXIS 2006), administration services provided by either the agent or broker, or through a third-party vendor hired by the agent or broker.

c) Human resource consulting services provided by either the agent’s or broker’s in-house human resource consulting business, or a third party hired by the agent or broker.

d) Access to an online employee benefits management system whose cost is paid by the agent or broker that provides a customized website for human resources (HR) administration and benefit communication.

3) May a payroll company that is affiliated with an insurance agent or broker charge lower fees for payroll administration services to a client who purchases insurance from the agent or broker?

4) May a bank that is affiliated with an insurance agent or broker provide a lower interest rate, loan approval or reduced banking fees to a banking client who purchases insurance from the agent or broker?

Conclusions:

1) No. An insurance agent or broker, in connection with the sale of group health insurance to an employer, may not provide prescription drug discount cards, or enrollment in an online information service that rates and provides information about physicians, at no cost to the employer, unless such benefits are specified in the insurance policy. Otherwise, such perquisites would constitute a rebate or inducement that violates Insurance Law § 4224.

2) Yes, as to a. Perhaps, as to b. No, as to c, and d. An insurance agent or broker may provide, at no additional fee, services that are normally provided by insurance agents or brokers in connection with the sale of health insurance, without running afoul of Insurance Law § 4224. The “employee benefit portal” is within the scope of administrative services normally provided in connection with the sale of insurance. Whether the “complete COBRA services” would constitute a rebate or inducement that violates Insurance Law § 4224 depends upon the specific types of services to be provided. The other services would constitute a rebate or inducement that violates Insurance Law § 4224, unless the services were specified in the insurance policy.

3) No. A payroll company that is affiliated with an insurance agent or broker may not charge lower fees for payroll administration services to a client who purchases insurances from the agent or broker, as that would constitute a rebate or inducement that violates Insurance Law § 4224.

4) No. A bank that is affiliated with an insurance agent or broker may not provide a lower interest rate, loan approval or reduced banking fees to a banking client who purchases insurance from the agent or broker, as that would constitute a rebate or inducement that violates Insurance Law § 4224.

Facts:

The inquirer is a licensed life and accident and health insurance broker. The inquirer reports that some of his clients have been approached by other agents or brokers who provide, at no charge to their clients, the services/benefits described herein. The inquirer asks whether he may lawfully offer these services/benefits, or whether they would constitute illegal rebates or inducements within the meaning of Insurance Law § 4224.

Analysis:

Insurance Law § 4224(c) applies to life insurance, accident and health insurance, and annuities, and prohibits, among other things, an insurer, insurance agent or insurance broker from offering an insured or potential insured an inducement or valuable consideration not specified in the insurance policy. Insurance Law § 4224(c) reads as follows:

No such life insurance company and no such savings and insurance bank and no officer, agent, solicitor or representative thereof and no such insurer doing in this state the business of accident and health insurance and no officer, agent, solicitor or representative thereof, and no licensed insurance broker and no employee or other representative of any such insurer, agent or broker, shall pay, allow or give, or offer to pay, allow or give, directly or indirectly, as an inducement to any person to insure, or shall give, sell or purchase, or offer to give, sell or purchase, as such inducement, or interdependent with any policy of life insurance or annuity contract or policy of accident and health insurance, any stocks, bonds or other securities, or any dividends or profits accruing or to accrue thereon, or any valuable consideration or inducement whatever not specified in such policy or contract; nor shall any person in this state knowingly receive as such inducement, any rebate of premium or policy fee or any special favor or advantage in the dividends or other benefits to accrue on any such policy or contract, or knowingly receive any paid employment or contract for services of any kind, or any valuable consideration or inducement whatever which is not specified in such policy or contract.

Question 1: Prescription Drug Cards and Physician Database

An insurance agent or broker, in connection with the sale of group health insurance to an employer, may not provide prescription drug discount cards, or enrollment in an online information service that rates and provides information about physicians, at no cost to the employer, unless such benefits are specified in the insurance policy. Otherwise, these valuable considerations constitute rebates or inducements in violation of Insurance Law § 4224.1

Question 2: Administrative Services

With respect to offers of administrative services, the Department opined in Opinion of General Counsel No. 07-03-10 (March 15, 2007) that:

if an insurer, insurance agent or broker provides, at no additional fee, services that are not normally performed by an insurer, insurance agent or broker in connection with the sale of health insurance, and the services are not provided by the insurance contract, then the insurer, insurance agent or broker violates [Insurance Law § 4224], which prohibits unlawful inducements or rebates.

Thus, generally speaking, an insurance agent or broker may provide or arrange to provide certain administrative services in connection with administering a purchased insurance policy, at no cost to an insurance client, without running afoul of Insurance Law § 4224, but only if the services are of the type normally provided or arranged by agents or brokers in connection with the sale of insurance, and the same services are provided to all similarly situated insureds. See Opinions of General Counsel No. 07-03-10 (March 15, 2007), 05-05-07-16 (July 13, 2005), 04-08-23 (August 23, 2004) and 05-06-34 (June 28, 2005). Such “normally provided or arranged” services include only those that pertain to insurance, as opposed to ancillary or auxiliary services that do not directly relate to the broker’s insurance activities.

Moreover, an insurance broker – but not an insurance agent - may provide administrative services to an insured for a fee, provided that the broker enters into a written contract with the insured in accordance with Insurance Law § 2119(c)(1). Opinions of General Counsel No. 07-03-10 (March 15, 2007) and 07-02-18 (February 20, 2007). In addition to complying with Insurance Law § 2119(c), the fee must be reasonable in relation to the service provided, and the broker may not charge different insureds different fees for the same service. See Opinions of General Counsel No. 07-03-10 (March 15, 2007) and 02-08-24 (August 30, 2002). However, as noted above, an insurance broker may make distinctions in fees charged based upon the type or amount of services provided to a particular client, or some other factor other than insured status. Opinion of General Counsel 02-08-24 (August 30, 2002).

Finally, the broker may not sell non‑insurance services or products in his capacity as insurance broker. Nor may the broker tie the solicitation of a non-insurance service or product to the sale of insurance. Rather, the broker must act independently in each capacity. Opinion of General Counsel No. 05-04-14 (April 15, 2005).

a. “Employee Benefit Portal”

The inquirer asks whether may provide access to a system created by or for him that contains useful information about group insurance plans currently in place, forms needed for plan administration, insurance company website links and answers to frequently asked questions related to the insurance.

In Opinion of General Counsel No. 05-07-16 (July 13, 2005), the Department concluded that an agent or broker could contract with an internet service provider to provide access to a service that would allow employees of a group insurance policyholder to directly access the insurance company to enroll and terminate employees under the policy, and to update the status of employees covered by the employer’s group insurance policy with regard to marriage and the number of eligible dependents receiving benefits. The Department also concluded that an agent or broker may lawfully provide access to “programs to assist with compliance of government rules and regulations concerning health and life insurance benefits.” Id. However, the insurance agent or broker must provide or arrange to provide the same services to “all similarly situated insureds, or in the case of groups, to all similarly situated group members and group policyholders, and may not negotiate with prospective insureds or group policyholders to provide [or arrange] services that my be more or less valuable.” Id.

Based upon the information that the inquirer has provided, his proposed system appears to come within the scope of what an insurance agent or broker may provide or arrange, since the features appear to be closely related to administering the policies. However, the inquirer was advised to consult with the Department if he should decide to add any additional features to determine if those features also come within the scope of what a broker may permissibly offer at no charge to clients and prospective clients.

b. COBRA Administration Services

Although COBRA administration services are generally deemed by the Department to be beyond the scope of services normally provided by insurance agents or brokers (See Opinion of General Counsel No. 07-02-18 (February 20, 2007)), whether an agent or broker may provide any COBRA administration services at no change to employers that purchase group health insurance depends upon the types of services provided. For instance, the Department has previously opined that certain limited COBRA services, such as billing former employees, or collecting the premiums and forwarding the aggregate amounts to the employer/client, may be provided lawfully at no charge. Opinion of General Counsel No. 05-06-34 (June 28, 2005). The Department also has stated that it is permissible for a broker to “perform COBRA administration services on behalf of clients whereby it bills COBRA recipients, remits their premiums to the insurance companies, keeps track of the recipients’ eligibility and retains the 2% surcharge [.]” Opinion of General Counsel No. 05-07-25 (July 26, 2005).

However, providing more extensive services without charge may not be permissible if such services are not normally provided by an insurance agent or broker. See e.g., Opinions of General Counsel No. 06-09-14 (September 21, 2006) and 04-03-25 (March 29, 2004)). In Opinion of General Counsel No. 06-09-14, the Department stated that the following combination of COBRA services could not be offered by an agent or broker, without charge, to clients (although some of these services may have been permissible on an individual basis or in combination with other permissible services): mailing out election notices to beneficiaries upon the occurrence of a qualifying event; monitoring the election period; collecting premium payments; monitoring the due dates and grace periods for premium payments; and remitting premium payments to the insurer. Moreover, in Opinion of General Counsel No. 04-03-25, the Department concluded that the following combination of services may not be offered free of charge to clients: instructions for initial notification to employees of their rights under COBRA; adjudication of eligibility; billing, collection, and processing of COBRA transactions; Participant Update reports that advise the employer of the need to add or remove individuals from the group health plan; a Participant Help Hotline; a Client Hotline; 24-7 automated information and full Web access to account information; remittance of monthly premiums to the employer with itemized reports; and retention of proof of compliance in professional document archives for long-term reference.

Although the inquirer did not set forth the specific services to be included in “complete COBRA administration,” the inquirer suggested that the Department consider the services provided by a company named ABC COBRA Services. But that company’s website does not offer sufficient information for the Department to conclude whether the company provides services more extensive than the limited permissible services described in Opinion of General Counsel No. 05-06-34. Thus, the inquirer’s question concerning whether an agent or broker may offer “complete COBRA administrative services” at no charge to policyholders must be answered in the negative if the services are not of the type normally provided or arranged by an insurance agent or broker. However, an agent or broker may provide limited COBRA services as described above to clients, without charge, either directly or indirectly through a third party vendor.

c. Human resources consulting services

Although the inquirer did not specify the particular services that constitute human resource consulting, the inquirer directed the Department to the website of a human resource consultant for examples of human resource consulting services. That consultant offers advice and training on human resource management issues, and provides HR services to businesses that outsource such functions. Because those services are generally outside the scope of what an insurance agent or broker normally provides, they would, if offered at no charge, constitute illegal inducement or rebates that violates insurance Law § 4224.

The Department has previously opined that the provision of the following services by an insurance agent or broker may constitue an illegal inducement or rebate: flexible spending administration services (Opinion of General Counsel No. 06-09-14 (September 21, 2006)); advice regarding compliance with federal and state laws concerning human resource issues (Opinion of General Counsel No. 06-09-09 (September 18, 2006)); management of other employee benefits programs other than the insurance sold by the agent or broker (Opinion of General Counsel No. 04-10-14 (October 15, 2004)); payroll services (id.); preparation of employee benefit statements listing all the benefits provided to employees by the employer (Opinion of General Counsel No. 06-03-02 (March 2, 2006)); development of employee handbooks and training (Opinion of General Counsel No. 04-10-14 (October 15, 2004)); and services related to compensation, discipline, job descriptions, leaves of absences, organizational development, business policies and practices, safety, staffing and recruiting (id.).

d. Online employee benefits management system

In Opinion of General Counsel No. 01-02-15 (February 26, 2001), the Department concluded that an agent or broker may not provide human resource services, at no charge, to its clients through an Internet-accessible system of a third party vendor, for that would constitute an unlawful rebate or inducement within the meaning of Insurance Law § 4224. The opinion noted that such services would constitute an unlawful rebate or inducement for two reasons. Id. First, the offer would persuade the clients to continue as clients of the agent or broker. Id. Second, given that the services cost $3 - $6 per employee per month, the consideration may not be regarded as negligible in value. Id. Thus, an agent or broker may not provide to clients, free of charge, access to an online employee benefits management system paid for by the agent or broker that provides a customized website for HR administration and benefit communication.

Questions 3 and 4: Discounted Payroll Services and Lower Bank Fees

A payroll company or a bank that is affiliated with an insurance agent or broker may not charge lower fees for payroll administration services, or provide a lower interest rate, loan approval or reduced banking fees, respectively, to clients who purchase insurance from the agent or broker where such discounts are based upon a person’s status as an insured. Such benefits are valuable consideration that constitute an illegal rebate or inducement within the meaning of Insurance Law § 4224. See Opinion of General Counsel No. 06-12-23 (December 29, 2006). Similarly, a broker who also operates a payroll business may not charge lower fees for payroll administration services based upon an individual’s or entity’s status as an insured. Opinions of General Counsel No. 04-10-14 (October 15, 2004) and 02-08-24 (August 30, 2002).

The Department’s position on this subject is well-established. In Opinion of General Counsel No. 02-08-24 (August 30, 2002), the Department stated that

a company that is licensed as an insurance broker in New York, which also sells non-insurance-related services (such as payroll and benefits administration services), may not make a distinction in the fees it charges for its non-insurance-related services based upon whether or not the customer also purchases the insurance brokerage services. However, such insurance broker is not prohibited from making a distinction in the fees it charges for its non-insurance-related services where such distinction is based upon the type and amount of non-insurance-related services it provides to a particular customer.

Similarly, in Opinion of General Counsel No. 06-12-23 (December 29, 2006), the Department stated that it would constitute a violation of Insurance Law § 4224 if a bank were to give a discount on bank service fees to customers who obtained a quote for insurance from an insurance agency owned by the bank. Given that Insurance Law § 4224 applies equally to prospective insureds as to current insureds, the same logic applies to reduced bank fees (and loan approvals or lower interests rates) offered to current insurance clients based upon their insured status. See Opinion of General Counsel No. 07-02-18 (February 20, 2007).

For further information you may contact Senior Attorney Brenda Gibbs at the Albany Office.